CFOs Question suppliers, customers, currently

tarik64

Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole proprietorship. She is trying to educate the owner on the importance of monitoring cash flows. Operating information as of the end of the most recent month appears below:

Cash from sale of truck of $7,000.
Cash salaries paid of $17,000.
Cash from customers of $45,000.
Depreciation expense of $5,500.
Interest on bank line of credit of $1,000.
Cash paid to suppliers of $22,000.
Other cash expenses, including rent, of $6,300.
No taxes due.

Using this information, what is the cash flow from operations for the month?


A) -$1,300.

B) $11,200.

C) -$300.

Correct Answer: A

I am a little confused by the answer given. Isn't "cash from sale of truck $7000" a gain on sale of equipment (primary business is landscaping and not selling trucks) thus an investing activity and not operating cash flow?? What I am missing here?

Someone enlighten me please....



Edited 1 time(s). Last edit at Monday, October 26, 2009 at 12:10AM by investragy.

ramzes

Yes, you are correct. "cash from sale of truck $7000" is an Investing Cashflow and not Operating Cashflow.

So, your Operating Cashflow is: -17,000 + 45,000 - 1,000 - 22,000 - 6,300 = -1,300

Also, note that you are not including Depreciation Expenses in Operating Cash Flow. Since, this is a Direct Method, just leave Depreciation Expenses alone.

If it was Indirect Method, you would have added back Depreciation Expenses to the Net Income.

Hope this helps.

LokiDog2

Looks like I was totally missing it.... I guess more sleep would help! Thanks!